Determining whether it’s cheaper to pay for private mortgage insurance (PMI) or to put up a larger down payment on a house depends on your specific financial situation and goals. Here are some steps to help you make an informed decision:
Calculate the cost of PMI: If your down payment is less than 20% of the home’s purchase price, your lender may require you to pay PMI. PMI costs can vary based on the loan amount, credit score, and other factors. Your lender can provide specific details on the PMI costs associated with your loan.
Assess the cost savings with a larger down payment: Compare the total cost of PMI over the time you expect to pay it (until the loan-to-value ratio reaches 78%) with the potential savings of making a larger down payment. A larger down payment means a smaller loan amount, which can result in lower monthly mortgage payments and less interest paid over the life of the loan.
Consider alternative uses for your cash: If you have the money for a larger down payment, weigh the opportunity cost of using that money for a down payment versus other financial goals. For example, paying off high-interest credit card debt or investing the money might yield higher returns compared to the savings from a larger down payment.
Factor in future home value appreciation: If you expect the value of the home to appreciate significantly in the coming years, it may impact when PMI gets automatically canceled (at 78% loan-to-value ratio). If the home appreciates rapidly, you may reach that threshold sooner, reducing the overall cost of PMI.
Evaluate your overall financial situation: Consider your long-term financial goals, current income, job stability, and other financial commitments when deciding between a larger down payment and paying PMI.
Consult with a financial advisor or mortgage professional: Seeking advice from a financial advisor or mortgage expert can help you better understand the trade-offs and make a decision that aligns with your financial objectives.
Ultimately, the decision depends on your unique circumstances and financial priorities. Whether you choose a larger down payment or opt for PMI, buying a home should fit comfortably within your budget and contribute to your overall financial well-being.